How does a demat account facilitate trading in derivatives? MintGenie explains

livemint.com:

demat account, or dematerialised account, serves as an electronic repository for holding and trading securities in digital form, eliminating the need for physical certificates. With a demat account, investors can conveniently buy, sell, and transfer securities electronically. To understand how a demat account facilitates trading in derivatives, it's important to first understand what derivatives are used for, their functions, and the different types of derivatives.

A derivative is a financial instrument whose value is derived from an underlying asset, such as stocks, bonds, commodities, currencies, or interest rates. Common types of derivatives include futures, options, forwards, and swaps. These instruments allow investors to hedge against risks, speculate on price movements, and manage exposure to various financial markets.

Also Read: What is the difference between a demat and a trading account? MintGenie explains Investors engage in derivative trading to mitigate risks arising from market volatility across various assets like stocks, bonds, commodities, and currencies. For example, investors opt for equity derivatives to hedge stock-related risks, commodity derivatives for gold price or crude oil volatility, currency derivatives for currency risk management, and interest rate derivatives for interest rate fluctuations. Among derivative products, options are popular among investors due to their potential for high returns if the trade moves in their favor.

Losses in options trading are limited to the premium paid to enter the contract. This high-reward and limited-risk strategy has attracted many investors to participate in options trading in recent years. Also Read: Sebi should educate investors but not over-regulate